The Finance Minister Ms Nirmala Sitharaman will be presenting her fifth Union Budget on 1st February. She has displayed a keen understanding of the macroeconomic backdrop, crafting her Budgets in line with the requirements of the economy. In particular, her mini-Budgets announced during the pandemic have been important fiscal instruments that have supported economic recovery together with structural reform. These have helped India to keep the immediate fiscal stimulus under control, even as the weaker sections have received targeted benefits. Businesses have appreciated the support provided through various means including the loan guarantees and the production linked incentives. 

In the current year, the main challenges arise from the external environment where recessionary conditions, supply bottlenecks and labour shortages prevail across many countries. Even though India lies in a sweet spot as it is projected to be the fastest growing major economy, external conditions are bound to have an impact. Any perception of weakness would hurt India’s attractiveness as an investment destination. The Budget should therefore focus on implementing reforms that would support the vision of becoming a developed economy by 2047. The CII suggestions are aimed at taking this forward, while at the same addressing the short-term challenge of demand creation. 

To begin with, the Budget must demonstrate a return to the path of fiscal sustainability. After rising to 9.2 per cent of GDP in 2020-21, the fiscal deficit has been credibly brought down to 6.9 per cent in 2021-22 and is projected to come down further to 6.4 per cent in the current year. This consolidation must continue with a gradual reduction to 6.0 per cent in 2023-24. Targets can also be fixed for a larger consolidation over FY25 and FY26 and a return to fiscal rules such as attaining zero revenue deficit. 

Tax reforms are critical for broadening the tax base to close the gap between India’s tax collection potential and actual collection. The Fifteenth Finance Commission has estimated that the tax-GDP ratio can be raised from 11.7 per cent currently to 16 per cent over the medium-term. Measures could include rationalization of multiple GST rates into a three-tier structure, bringing exempted goods such as petroleum products, electricity tariffs and real estate under GST, improving tax administration through information sharing and faster appeal process for tax disputes. 

While the Budget cannot make changes to the GST structure, much can be done to improve the ease of paying taxes. CII has made recommendations on better functioning of mechanisms such as Faceless Appeals and Dispute Resolution Schemes as also simplification of TDS payments. Consistency in capital gains tax for different asset classes has also been sought. 

To raise revenue, CII has urged the Government to accelerate the disinvestment of PSUs. One way to accelerate privatization is to transfer the authority for the identified PSU to DIPAM from the line Ministry once the decision to privatize the company has been taken. The target for receipts from asset monetization should be stepped up with a focus on railways and telecom sectors.

 In view of the turbulent external environment, CII has suggested several measures to support demand generation for both consumers and businesses. CII has suggested rationalization of income tax slabs and rates for individuals at the lower end. A lower effective tax rate will put money in the hands of consumers and increase sales of mass consumption products. There should not be any further increase in the excise duty on fuel products, rather duty cuts should be considered. 

On investment, CII has suggested an increase in the allocation to capital expenditure to 3.3-3.4 per cent of GDP from 2.9 per cent currently. The focus should be on green infrastructure like renewables as well as traditional infrastructure like railways, roads and ports. Rural infrastructure projects should be expedited together with spending on PMAY to provide housing for all. In addition to public capex, private sector participation in PPPs should be facilitated through swift dispute resolution mechanism. 

India needs to increase its investment in R&D from the present level of 0.7 per cent of GDP which is completely inadequate for developing competitiveness in emerging areas. For this, CII has suggested that private companies be brought under the umbrella of government funding for research. The suggestion made in last year’s Budget that 25 per cent of the defence R&D Budget will be earmarked for industry, start-ups and academia is yet to be implemented. 

The Budget could consider creation of a joint Industry-Government S&T Advisory Council which will discuss ways to collaborate on R&D. One issue that would facilitate industry-led R&D is the treatment of IP as an acceptable collateral for loans from banks. 

The Budget needs to provide policy direction towards achieving our goals on mitigating climate change. CII has suggested that a national strategy for climate responsive budgeting be developed. Few states like Odisha and Gujarat are publishing budget statement to track climate related public expenditure. This should be taken up on a national basis with well defined criteria for identifying green expenditure. 

Other suggestions for mitigating climate change include the following: create a DFI for climate and energy transition where the DFI would act as a nodal agency for funding energy transition; create a special fund for MSMEs to encourage reduction in their carbon footprint; boost production of green hydrogen by providing production linked incentives to electrolysers. 

Finally, the Budget must focus on the quality of human capital by stepping up the expenditure on health and education. Skill development through widespread vocational education must also become integral to the system. Some of the schools being built under the “PM Shri” schools programme can be built as vocational schools. 

The Budget should inspire confidence among investors, taxpayers as well as the common man/ woman. It must focus on stepping up the competitiveness of Indian goods and services so that their global footprint can be expanded. India has set ambitious goals for 2047, its 100th year of independence. The Budget is an opportunity to take steps that will make these achievable.

The article was first published in CII Communique, January 2023 issue.

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